A powder keg waiting to explode

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Molly Pollock looks at the structure of companies in the UK and Scotland and finds many Brexit worries with one businessman describing it as a powder keg

Small businesses are worried. Some have already felt the effects of impending Brexit, seeing a fall-off in sales and rising costs since the EU referendum in 2016; others are anxious, unsure what might happen and annoyed there has been so little information and preparation for such a cataclysmic event – an event they feel is about to impact not only on their businesses but on their families and their livelihoods.

For those in Scotland there is the added annoyance that Scots voted 62% to remain, so feel they are being dragged out against the will of the majority.  All this at a time when small businesses are being encouraged to grow and export to boost the Scottish economy.

And in case you think the wellbeing and future health of SMEs (small and medium sized enterprises) doesn’t matter in the larger scheme of things where monolithic businesses like Amazon rule the roost, there were 5.7 million SMEs in the UK in 2017, over 99% of all businesses. An SME is defined by the EU as any business with fewer than 250 employees with an annual turnover not exceeding 50 million euros, and/or an annual balance sheet total not exceeding 43 million euros.

Total employment in SMEs in the UK in 2017 was 16.1 million; 60% of all private sector employment, with a combined annual turnover of £1.9 trillion, 51% of all private sector turnover.
So small businesses certainly matter.

According to Insider small firms have helped drive the bounce back in GDP with UK economic output growing by 0.4%in the second quarter of 2018 (according to Richard Murphy it is private debt that continues to fund consumption growth) –  But the FSB warns that “these firms are facing a perfect storm of high employment costs and rising business rates.” The article goes on to say that “small exporters have been consistently bullish over the past year, thanks in part to a weaker pound.”

Rising bank rate

That reported bullishness is not what is coming through on social media from numerous hurting and worried SME businesspeople whose companies have been adversely impacted by the pound’s fall and the reaction of European companies to Brexit, plus the possibility of yet another bank interest rate hike.

Online many small UK businesses are either expressing worry or anxiety about their future, though a small number do remain publically buoyant about the opportunities Brexit will bring. However, when reading what some of the more upbeat believe, it is easy to be left wondering how cognisant they are about UK losses when the EU is left behind, and of their knowledge of WTO rules.

Deborah Meaden, star of the BBC’s Dragon’s Den programme and a high-profile entrepreneur, recently took to Twitter, having decided to become more vocal about Brexit as she “realised the extent of lies, illegal activity, prospect of No Deal, [and the] effect it is already having on peoples lives”.

She tweeted asking her 270K followers if there were any who supported Brexit and didn’t receive one response.

According to ONS as at March 2017 there were 174,625 businesses in Scotland registered for VAT and/or PAYE

These were broken down into the following activities:

In 2017 the total number of businesses in Scotland increased by 4% over the total for the previous year with non-employing businesses accounting for 79% of the overall increase.

In Scotland at March 2017 there were an estimated 365,600 private sector enterprises. 363,235 were Small and Medium-sized Enterprises (SMEs), providing an estimated 1.2 million jobs. These SMEs accounted for 99.4% of all private sector enterprises and for 55.0% of private sector employment and 40.1% of private sector turnover. Of these, over 98% were small (0 to 49 employees); 1.1% were medium-sized (50 to 249 employees) and 0.6% were large (250 or more employees).

Sole Proprietors/Partnerships account for 67.2% of enterprises and 20.2% of employment, while companies account for 30.7% of enterprises and 71.4% of employment. Small enterprises alone accounted for 42.6% of private sector employment and 26.7% of private sector turnover. The 2,365 large enterprises accounted for 45.0% of private sector employment and 59.9% of private sector turnover. So small enterprises in Scotland employ almost as many people as large companies.

Harder for small businesses to plan for the unknown

Unregistered enterprises (those not large enough to be VAT registered, as their annual turnover is below the VAT threshold of £83,000, and are not PAYE registered either (i.e. do not employ others) represent 51.8% of all private sector enterprises in Scotland, while those with no employees – that is sole proprietors/partnerships accounted for 70.6% of all private sector enterprises in Scotland, 13.5% of private sector employment and 4.9% of private sector turnover. Such businesses will find Brexit changes difficult to deal with because of lack of time and manpower to get to grips with new regulations.

These figures help explain why so many SMEs are anxious about Brexit and their futures. 76% of UK businesses (70.6% in Scotland) are one man/one woman enterprises. So little time for delving into the complexities of WTO tariffs and getting to grips with what new red tape will entangle them. The choice is doing business and earning a living, or not doing business and researching what will be necessary for them to continue after the end of March 2019.

Until recently businesses have been reticent to break cover and express concerns about Brexit. But recently a number of high profile companies have made their concerns heard in a very public manner with some indicating relocation was on the cards unless the UK government could secure a good deal with the EU, and a good deal in most cases was remaining in the single market and customs union which is not what Theresa May’s government is working towards.

Bad decisions bad for business and jobs

As negotiations have unravelled and the full horror of Brexit and life under WTO rules dawns, many small business owners have taken to social media to express their concerns, feeling helpless that their voices cannot be heard at UK government level. To those who insisted stopping Brexit or holding a second vote would be anti-democratic, a number pointed out that in business if you took what turned out to be a bad decision you couldn’t afford to abide by it. Instead you swiftly cut your losses and implemented a new strategy to get your business back on track. Pursuit of a bad decision can mean the end of the business.

In the face of a few stalwarts who still maintain Brexit is brilliant and will put the ‘Great’ back in Great Britain, the concerns expressed by SMEs are similar. A few remind that GDP is now 2% lower than it would have been with a remain outcome, despite prompt action from the Bank of England. So the UK, even before leaving, is already approximately £40bn, or about £900 per household, worse off. https://www.independent.co.uk/news/business/news/brexit-uk-gdp-economy-drop-mark-carney-bank-of-england-40-billion-pounds-a8363106.html

Best for Tory party – worst for us

Annoyance is expressed at the UK government’s use of non-disclosure agreements (NDAs), with stories of companies threatened with no further government contracts if they don’t abide by these. Business people see the use of NDAs as being more about the survival of the government and Tory party rather than what is best for the UK.

Whilst some have benefitted from it, perhaps it’s not surprising that a sizeable number of businesses have already been affected by the drop in the pound since the EU referendum, with some companies trading with EU countries having to cease because of the pound’s fall. Remember these are small companies with limited resources to fall back on when times turn against them. One businessman who imports equipment from Italy wrote of losing out significantly, with projects now harder to find and future planning almost impossible as he has no idea what will happen.

Slumping sterling

Although small businesses are more likely to trade within the UK than export, they are still at the mercy of fluctuations in the exchange rate. The low pound, with margins changing on a daily basis and very rarely positively, is making trading extremely difficult for any small business importing products or raw materials. The talk is all about tariffs, a businessman said, but the drop in the value of the pound is having a huge impact too as margins are under pressure and getting tighter. And it’s not only businesses affected by this, higher costs work through to what the public needs to pay for goods.

Some businesses, after the recent downturns due to Brexit uncertainty, have been forced into dramatic restructuring, with fears for their future viability. Others are cutting back on staff and delaying taking on additional staff. One small recruitment agency has lost major international clients as the companies have relocated to Holland. More clients are expected to be lost in the near future.

With businesses under pressure, investment in manufacturing will take a hit, resulting in the loss of jobs over and above those already lost through companies relocating to Europe. So those who voted for Brexit hoping for a better deal in life are in for a nasty shock when they learn their jobs could well be at risk. Manufacturers, even SME manufacturers, who export most of their output to the EU are grasping the bull by the horns and relocating, like their larger counterparts, to EU countries, saying it feels risky to only have a UK office, and by relocating they will avoid tariffs which could price their goods out of the market if they remained in the UK where the home market is likely to shrink due to cost of living squeezes, job losses and increasing private debt.

The owner of a small company, with 90% of her business in the UK, says people ask why she is worried, not realising her stock comes from the EU. If her customers experience a squeeze in their standard of living due to increased food, utility and other costs, her business is then at risk. And these pressures on living costs are being experienced now, by consumers and by many SMEs. The Dutch government has already informed businesses in the Netherlands that dealing with UK manufacturers will hit their bottom line to the tune of 5-10%, so is advising them to change from UK to EU manufacturers. This isn’t project fear, says one businessman, this is happening right now. Today. It’s project reality. Another factor is the changed attitude of clients in Europe turning against UK firms, and clients getting cold feet with contracts, with the UK government regarded as stupid.

European confidence in UK at all time low

Many businesspeople are frustrated by a lack of public understanding, asking why people doubt this is happening, shouting project fear when mentioned? Much in business is about confidence; confidence in supply chains, the strength and stability of the supplier post-Brexit, and the complexity of trading. So EU companies are already cancelling UK contracts to work with European based companies, preferring to work under the EU financial regulatory process. Numerous SMEs report deals drying up, businesses seriously pausing for breath, and waiting to see if they need to start holding their breath.

As well as the plummeting pound and tariff fears, businesses also now face difficulties in recruitment due to a severe skills gap with fewer migrants crossing the Channel to work in the UK. All this means postponement of strategic investment decisions due to uncertainty and already impacting Brexit effects.

One of the most repeated criticisms is a lack of information on what leaving the EU and trading under WTO terms actually means, with much misinformation and little understanding about the WTO. Some view the WTO as more cumbersome and less democratic than the EU. Others see it as a breath of fresh air, an organisation which lets members do as they like, so welcome the thought of being free of what they view as the EU yoke; yet others are aware trading under WTO rules will be much more complicated than trading within the EU; while some haven’t a clue.

Return of customs declarations and paperwork

All, however, blame the UK government for a total lack of information to allow them to prepare for the change. Information is promised, but most see it as too late with little expectation that the 70 documents will be helpful, bowdlerised into blandness. One small company that helps businesses make decisions under uncertain conditions – such as those presented by Brexit – has seen a 300% increase in enquiries. A Customs Clearance Agent said it is known that a hard Brexit will increase customs workload ten fold, but until they have details they can’t gear up to react to the increase. And time is running out to enable necessary changes to be implemented.

Whilst some commenters pinned their hopes on increasing the 55% of UK exports that are outside the EU, they were reminded that at present we are trading with these countries as EU members, benefiting from the trade deals the EU has secured. We are party to 759 agreements via our membership of the EU. All of those fall when we leave and will have to be renegotiated – on worse terms as we lack the negotiating muscle of the large EU market.

UK WTO schedules  facing rejection

Proposed WTO schedules have been rejected by countries with whom the key Brexiters promised fast free trade agreements. New Zealand is one of eight countries that have refused to accept the UK’s WTO quota proposal, as has the US, which slapped high tariffs on steel and aluminium, and intended doing the same on Bombardier aircraft before the EU stepped in to defend the UK. The other countries rejecting the UK schedules are Argentina, Brazil, Canada, Thailand, Uruguay and Spain.

It only needs one to block our trading schedules and we’re in trouble. The WTO is an organisation designed for goods not services, point out business people, and the UK is a service-based economy.

Some businesspeople regarded trashing the UK’s relationship with its nearest neighbours and biggest free market in the world in order to chase deals in far-flung places as foolhardy, citing government analysis that indicates what we gain as a result of new free trade agreements (even on highly optimistic assumptions) won’t compensate for what we have now because a market of 66 million cannot negotiate the same terms as a market of 506 million. And that’s without taking into account the newly signed Japanese trade deal that will provide access to 600 million people with a third of the world’s GDP (CNN Money). Why start all over again from a weaker position they ask? Size matters in trade deals.

A belief was expressed that post-Brexit customs formalities would cripple or finish off many export/import SMEs. Rules of origin are seen as a real can of worms. That consultation with businesses is only now getting underway on this was regarded as borderline negligent. VAT payable upfront on entry is also a massive issue, hitting cashflows when goods are imported, and dunting the cashflows of EU customers when companies export. Brexit, said one businessperson, meant added bureaucracy, cost and risk, that would be highly damaging for British businesses and their employees.

A number of those commenting had voted to leave, but now believe they were conned, with empty marketing slogans taking the place of proper information. Project fear, they considered, seemed to be pretty accurate so far. If anything, many felt they hugely misjudged how incompetent and even delusional Davis, Fox and the other main Brexiters would be. With the reality of many unknowns and guesses now emerging, and a strong feeling that this was not what they voted for, there were expressions of interest in a second vote to resolve the matter, the only way to stop the deep division they believe is cleaving the country.

The feelings of many were summarised by the businessman who said the whole situation was a powder keg waiting to explode and that he feared for what would happen next.